What Are International Financial Reporting Standards (IFRS)?

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Updated June 10, 2024
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Part of the Series
Guide to Accounting
Accounting Basics
  1. Accounting Explained With Brief History and Modern Job Requirements
  2. Accounting Equation
  3. Asset
  4. Liability
  5. Equity
  6. Revenue
  7. Expense
  8. Current and Noncurrent Assets
Accounting Theories and Concepts
  1. Accounting Theory
  2. Accounting Principles
  3. Accounting Standard
  4. Accounting Convention
  5. Accounting Policies
  6. Principles-Based vs. Rules-Based Accounting
Accounting Methods: Accrual vs. Cash
  1. Accounting Method
  2. Accrual Accounting
  3. Cash Accounting
  4. Accrual Accounting vs. Cash Basis Accounting
Accounting Oversight and Regulations
  1. Financial Accounting Standards Board (FASB)
  2. Generally Accepted Accounting Principles (GAAP)
  3. International Financial Reporting Standards (IFRS)
    CURRENT ARTICLE
  4. IFRS vs. GAAP
  5. US Accounting vs. International Accounting
Financial Statements
  1. Understanding the Cash Flow Statement
  2. Breaking Down The Balance Sheet
  3. Understanding the Income Statement
Corporate Accounting
  1. Accountant
  2. Financial Accounting
  3. Financial Accounting and Decision-Making
  4. Corporate Finance
  5. Financial vs. Managerial Accounting
  6. Cost Accounting
Public Accounting: Financial Audit and Taxation
  1. Certified Public Accountant (CPA)
  2. Chartered Accountant (CA)
  3. Accountant vs. Financial Planner
  4. Auditor
  5. Audit
  6. Tax Accounting
  7. Forensic Accounting
Accounting Systems and Record Keeping
  1. Chart of Accounts (COA)
  2. Journal
  3. Double Entry
  4. Debit
  5. Credit
  6. Closing Entry
  7. Invoice
  8. Introduction to Accounting Information Systems
Accounting for Inventory
  1. Inventory Accounting
  2. Last In, First Out (LIFO)
  3. First In, First Out (FIFO)
  4. Average Cost Method

What Are International Financial Reporting Standards (IFRS)?

International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world.

IFRS currently has complete profiles for 168 jurisdictions, including those in the European Union. The United States uses a different system, the generally accepted accounting principles (GAAP).

The IFRS is issued by the International Accounting Standards Board (IASB).

The IFRS system is sometimes confused with the International Accounting Standards (IAS), which are the older standards that the IFRS replaced in 2001.

Key Takeaways

  • International Financial Reporting Standards (IFRS) were created to bring consistency and integrity to accounting standards and practices, regardless of the company or the country.
  • They were issued by the London-based Accounting Standards Board (IASB) and address record keeping, account reporting, and other aspects of financial reporting.
  • The IFRS system replaced the International Accounting Standards (IAS) in 2001.
  • IFRS fosters greater corporate transparency.
  • IFRS are not used by all countries; for example, the U.S. uses generally accepted accounting principles (GAAP).

Investopedia / Paige McLaughlin

Understanding International Financial Reporting Standards (IFRS)

IFRS specify in detail how companies must maintain their records and report their expenses and income. They were established to create a common accounting language that could be understood globally by investors, auditors, government regulators, and other interested parties.

The standards are designed to bring consistency to accounting language, practices, and statements, and to help businesses and investors make educated financial analyses and decisions.

They were developed by the International Accounting Standards Board, which is part of the not-for-profit, London-based IFRS Foundation. The Foundation says it sets the standards to “bring transparency, accountability, and efficiency to financial markets around the world."

IFRS vs. GAAP

Public companies in the U.S. are required to use a rival system, the generally accepted accounting principles (GAAP). The GAAP standards were developed by the Financial Standards Accounting Board (FSAB) and the Governmental Accounting Standards Board (GASB).

The Securities and Exchange Commission (SEC) has said it won't switch to International Financial Reporting Standards but will continue reviewing a proposal to allow IFRS information to supplement U.S. financial filings.

There are differences between IFRS and GAAP reporting. For example, IFRS is not as strict in defining revenue and allows companies to report revenue sooner. A balance sheet using this system might show a higher stream of revenue than a GAAP version of the same balance sheet.

IFRS also has different requirements for reporting expenses. For example, if a company is spending money on development or on investment for the future, it doesn't necessarily have to be reported as an expense. It can be capitalized instead.

Standard IFRS Requirements

IFRS covers a wide range of accounting activities. There are certain aspects of business practice for which IFRS set mandatory rules.

  • Statement of financial position: This is the balance sheet. IFRS influences the ways in which the components of a balance sheet are reported.
  • Statement of comprehensive income: This can take the form of one statement or be separated into a profit and loss statement and a statement of other income, including property and equipment.
  • Statement of changes in equity: Also known as a statement of retained earnings, this documents the company's change in earnings or profit for the given financial period.
  • Statement of cash flows: This report summarizes the company's financial transactions in the given period, separating cash flow into operations, investing, and financing.

In addition to these basic reports, a company must give a summary of its accounting policies. The full report is often seen side by side with the previous report to show the changes in profit and loss.

A parent company must create separate account reports for each of its subsidiary companies.

Note

Chinese companies do not use IFRS or GAAP. They use Chinese Accounting Standards for Business Enterprises (ASBEs).

History of IFRS

IFRS originated in the European Union with the intention of making business affairs and accounts accessible across the continent. It was quickly adopted as a common accounting language.

Although the U.S. and some other countries don't use IFRS, currently 168 jurisdictions do, making IFRS the most-used set of standards globally.

Who Uses IFRS?

IFRS is required to be used by public companies based in 168 jurisdictions, including all of the nations in the European Union as well as Canada, India, Russia, South Korea, South Africa, and Chile. The U.S. and China each have their own systems.

How Does IFRS Differ From GAAP?

The two systems have the same goal: clarity and honesty in financial reporting by publicly-traded companies. IFRS was designed as a standards-based approach that could be used internationally. GAAP is a rules-based system used primarily in the U.S.

Although most of the world uses IFRS standards, it is still not part of the U.S. financial accounting world. The SEC continues to review switching to the IFRS but has yet to do so.

Several methodological differences exist between the two systems. For instance, GAAP allows a company to use either of two inventory cost methods: First in, First out (FIFO) or Last in, First out (LIFO). LIFO, however, is banned under IFRS.

Why Is IFRS Important?

IFRS fosters transparency and trust in the global financial markets and the companies that list their shares on them. If such standards did not exist, investors would be more reluctant to believe the financial statements and other information presented to them by companies. Without that trust, we might see fewer transactions and a less robust economy.

IFRS also helps investors analyze companies by making it easier to perform “apples to apples” comparisons between one company and another, and for fundamental analysis of a company's performance.

The Bottom Line

The International Financial Reporting Standards (IFRS) are accounting rules for public companies with the goal of making company financial statements consistent, transparent, and easily comparable around the world. This helps with auditing, tax purposes, and investing.

Article Sources
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  1. International Financial Reporting Standards. "Who Uses IFRS Standards?"

  2. Financial Accounting Standards Board. "Comparability in International Accounting Standards - A Brief History."

  3. International Financial Reporting Standards. "Who We Are."

  4. U.S. Securities and Exchange Commission. "Working Together to Advance High Quality Information in the Capital Markets."

  5. International Financial Reporting Standards. "IAS 1 Presentation of Financial Statements."

  6. International Financial Reporting Standards. "IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors."

  7. China Briefing. "Chinese Accounting Standards for Business Practices: Prepare for Changes in 2021."

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Part of the Series
Guide to Accounting
Accounting Basics
  1. Accounting Explained With Brief History and Modern Job Requirements
  2. Accounting Equation
  3. Asset
  4. Liability
  5. Equity
  6. Revenue
  7. Expense
  8. Current and Noncurrent Assets
Accounting Theories and Concepts
  1. Accounting Theory
  2. Accounting Principles
  3. Accounting Standard
  4. Accounting Convention
  5. Accounting Policies
  6. Principles-Based vs. Rules-Based Accounting
Accounting Methods: Accrual vs. Cash
  1. Accounting Method
  2. Accrual Accounting
  3. Cash Accounting
  4. Accrual Accounting vs. Cash Basis Accounting
Accounting Oversight and Regulations
  1. Financial Accounting Standards Board (FASB)
  2. Generally Accepted Accounting Principles (GAAP)
  3. International Financial Reporting Standards (IFRS)
    CURRENT ARTICLE
  4. IFRS vs. GAAP
  5. US Accounting vs. International Accounting
Financial Statements
  1. Understanding the Cash Flow Statement
  2. Breaking Down The Balance Sheet
  3. Understanding the Income Statement
Corporate Accounting
  1. Accountant
  2. Financial Accounting
  3. Financial Accounting and Decision-Making
  4. Corporate Finance
  5. Financial vs. Managerial Accounting
  6. Cost Accounting
Public Accounting: Financial Audit and Taxation
  1. Certified Public Accountant (CPA)
  2. Chartered Accountant (CA)
  3. Accountant vs. Financial Planner
  4. Auditor
  5. Audit
  6. Tax Accounting
  7. Forensic Accounting
Accounting Systems and Record Keeping
  1. Chart of Accounts (COA)
  2. Journal
  3. Double Entry
  4. Debit
  5. Credit
  6. Closing Entry
  7. Invoice
  8. Introduction to Accounting Information Systems
Accounting for Inventory
  1. Inventory Accounting
  2. Last In, First Out (LIFO)
  3. First In, First Out (FIFO)
  4. Average Cost Method